A binary options strategy can be your autopilot to binary options success – if you follow a few rules. With the wrong strategy, you would doom yourself to a career of losses. In this guide, we explain everything you need to know about a binary options strategy, how you can find the right strategy for you, and how you can test your strategy without risking a single Cent.
In detail, we will answer these questions:
- What is a binary options strategy?
- Why do I need a binary options strategy?
- How can I find the right binary options strategy risk-free?
- How do I know if my binary options strategy works?
- What are examples of binary options strategies?
With the answers to these questions, you will be able to start a profitable trading career in a risk-free environment. When you start to invest real money, you will be able to turn a profit from the start.
What is a binary options strategy?
A binary options strategy is a set of rules that precisely defines how you trade. It defines how you find new trading opportunities, how you react to them, and how much you invest in each individual trade. With a good trading strategy, you know exactly which assets to trade and how to trade them – which binary options types to use and which expiries.
In detail, a binary options strategy consists of three sub-strategies. These sub-strategies are:
- A trading strategy,
- A money management strategy, and
- An analysis and improvement strategy.
Let’s take a closer look at each type of these strategies.
What is a trading strategy?
Your trading strategy defines your first step to binary options success. Your trading strategy defines how you analyze the market and find profitable trading opportunities.
Your trading strategy defines the assets you monitor and how you monitor them. For example, your trading strategy could define that you monitor only currencies, that you are using technical indicators to find trading opportunities, and that you invest every time a specific indicator generates a certain reading. In this way, a trading strategy defines your market analysis process as precisely as possible.
Of course, there are hundreds, or even thousands, of possible trading strategies. The important thing to understand about these different alternatives is that your trading strategy defines a large part of your strategy’s character. With some trading strategies, you create risky signals that also offer a high potential. With others, you follow the slow-and-steady approach. Some strategies will create 20 or even 50 signals a day, others only 2 or 5.
To trade a strategy successfully, it is crucially important that you match your strategy to your character. Only when you feel comfortable with your strategy and have the time and the skill to execute it perfectly, you can make money with it.
What is a money management strategy?
When you trading strategy has found a trading opportunity and defined the binary options type with which you want to trade it, you need to decide how much you want to invest in this trade. This is what your trading strategy is for.
Deciding how much money you should invest in a single trade is a major decision. When you invest too much and lose the trade, you might have dug yourself a hole you can never come out of. Many traders who became careless and invested 50 percent of their overall capital or more on a single trade, eventually regretted the decision for the rest of their lives because it ruined their trading careers. When you lose 50 percent of your capital, you need a 100 percent gain to get it back – which is a long way to go. It is much smarter not to lose the money in the first place.
Other traders invest too little on each trade. While this approach guarantees that can avoid sudden bankruptcy, it also guarantees that they will never make any significant profit. After a while, these traders give up on binary options because they simply make too little money.
To find the ideal investment per trade, you money management strategy defines a fixed percentage of your overall capital that you invest every time. Ideally, this amount is less than 5 percent. Risk-averse traders should choose around 2 to 3 percent.
With an account balance of $1,000 and an investment per trade of 3 percent, you would invest $30 on your next trade. As your account balance changes, you would adapt your investment per trade accordingly. If your account balance increases to $1,500, you will invest $45, and if should suffer a losing streak that sets you back to $1,000 again, you would reduce your investment per trade to $30 again.
With this system, you always invest the right amount, never too much and never too little. Losing streaks no longer threaten your trading career, and you automatically invest more as you get more money. A good money management is your autopilot to success.
What is an analysis and improvement strategy?
After you have traded for a while, you will have made some money, or you will have lost some money. But why? And how can you guarantee that you keep your profits rolling in or turn a loss into a profit? This is what an analysis and improvement strategy are for.
An analysis and improvement strategy help you to understand your strengths and your weaknesses. It helps you to identify the things that make you money and the things that cost you money and to strengthen your strengths and cut out your weaknesses.
In its simplest form, an analysis and improvement strategy could be a trading diary. In this diary, you note why you made an investment and which tools you used for your market analysis. Once the trade is over, you note whether you won or lost the trade and how much money you made or lost.
After a while, this list will allow for a pretty good idea of which of your actions you should cut out of your trading and which you should strengthen.
Assume that you are trading high/low options. Maybe you find that your profit trading high options is significantly higher than your profit trading low options. This information helps you to understand that it suits your personality better to search for rising prices and things that go well than to play Dr. Doom and look for problems and falling prices. As a consequence, you could cut low options out of your trading and focus solely on high options. After a while, you will know if this approach increases your profit or not, and if it does, stick with it.
The details of your analysis and improvement strategy are entirely up to you. Whatever works, works. Find the way that helps you to understand your trading, and utilize it. This can be a written account, screenshots, videos, or anything else. Just make sure you identify the things that win you money and the things that lose you money.
Why do I need a binary options strategy?
A binary options strategy is so crucially important to your success because it makes the emotions out of your trading. Without a strategy, traders a limited to more or less random investments, following their gut instinct, what they hear on the news or the first market movement that looks nice to them. This type of investment philosophy is incapable of generating positive long-term results.
The most important part of your trading strategy is your analysis and improvement strategy. It helps you to identify the elements of your trading that make you money and those that do not, enabling you to improve your results continually. Without an analysis and improvement strategy, you would be unable to improve your trading and forever remain at the initial stage of relative cluelessness.
To be able to have an analysis and improvement strategy, you need the other two parts of your strategy, a trading strategy, and a money management strategy. These two strategies make your trading analyzable and repeatable, both essential requirements to evaluate your trading later on. To know whether what you did worked for you, you first have to know whether what works for you.
Only when you have a clearly defined trading strategy and money management strategy, you are able to improve your trading. Without them, you will remain at your initial skill level, forever unable to make progress. Just think about your first time driving a car. Did you know what to do back then? Probably not. To avoid losing all of your money by investing similarly clueless, define your trading strategy and money management from the start and improve them constantly with your analysis and improvement strategy.
How can I find the right binary options strategy risk-free?
As we alluded to earlier, the right strategy is the strategy that matches your character. The difficult part about matching your strategy to your character is that it is difficult to predict which type of strategy will be right for you. Many traders started their trading careers with a strategy that they thought was perfect them but eventually ended up trading a strategy from the exact opposite end of the spectrum.
These mistaken self-evaluations can cost a trader a lot of money. Potentially, they can even ruin a young trading career before it began. Consequently, you have to make sure that you start your trading career with the right strategy for you. Luckily, there is a tool that can help you to find the right strategy without risking a single Cent.
This tool is a binary options demo. A demo account works just like a regular trading account, but it allows you to test binary options and the broker that offers the demo with play money instead of real money.
In this risk-free environment, you can try different strategies and find the right trading style for you. You can experiment, try different things, and only have to join real-money trading when you have developed a strategy that guarantees that you make money by the end of the month. In this way, a binary options demo account is the ideal way for any trader to start their trading career.
Most brokers offer demos of their service. The important thing to understand about binary options demos is that most of them are only available to customers of the broker. To get a broker’s demo, you have to register a trading account with the broker, and in the registration process, you have to deposit money with the broker, usually at least $250. For newcomers, this system makes no sense. Luckily, there is another option.
Nadex and IQ Option offer their demos as stand-alone accounts, not as features of their regular accounts. You can sign up directly for the demo, without having to take the step of registering a regular account first. All you have to do is log into the demo with your email, your Facebook account, or your Google account, just like you would log into a mobile game.
To decide whether you should choose Nadex or IQ Option, you should know that Nadex is the only broker that is allowed to offer binary options to U.S. traders because it is the only broker that accepts regulation by the U.S. government’s regulatory authority, the CFTC.
If you live in the United States, Nadex is the only broker with which you can trade for real money, which is why logic suggests that you get their demo, too. For traders outside the U.S., the IQ Option demo is a legitimate alternative. IQ Option is regulated by the European Union and a trustworthy broker, too.
Considering the current legal situation, U.S. traders can use the IQ Option demo, too. After all, when you trade the demo, there is no real money involved, and you are not really trading a binary option. When you want to take the step from play money to real money, however, U.S. traders are unable to stay with IQ Option and have to switch to Nadex. Consequently, using the IQ Option cannot be your start to a long, successful trading career. It can only be an added information, a way for traders to get to know a trader other than Nadex.
The other major difference between the Nadex demo and the IQ Option demo is the amount of play money you get. With Nadex, you get a whopping $25,000, with IQ Option only $1,000. While it is exciting to get $25,000, the IQ Option demo better resembles the trading environment most newcomers to binary options encounter when entering the market. Consequently, it can make sense for U.S. customers to get to learn how to trade your way to success when you have to start with a limited amount of money.
All other binary options brokers except Nadex and IQ Option offer they demos to customers of their regular accounts only. These demos are neither worse nor inherently wrong, and you can withdraw your deposit after you are done with your demo. Nonetheless, you should think twice before you decide whether the investment is worth the money if you can have the same thing for free.
How do I know if my binary options strategy works?
Most of the traders that lose money with Binary Options do so because they do not follow a definite strategy. They make random trades, win some money and lose some money. After a while, however, they have lost more than they have won and don’t know how to fix the problem. This article What is a Binary Options Strategy will teach you how to avoid the number one mistake that causes traders to lose their money!
The goal of a Binary Options strategy is to take the random aspect out of your trading. A strategy provides you with a definite set of assets, signals, and ways to trade them. Signals can be created from reading the price chart or reacting to events like news about a stock. Some strategies are even based on betting models. What is a binary options strategy, that you wish to choose – your job as a trader is to follow the strategy as close to 100 percent of the time as you can.
The success of each strategy is determined by two variables:
- The percentage of trades you win with the strategy, and
- How much money you win in relation to the amount you invested.
If we multiply both, we can find out if a strategy helps you win or lose money.
To understand this, let’s imagine a coin flip. You will end up winning 50% of all the bets you make, and you will get twice the invested amount if you win. In strategy terms this means: 50% (winning percentage) x 2 (amount you win) = 100%. In other words, if you apply this strategy for 100 trades, you will end up with exactly the same amount of money you started with.
If we can tweak this strategy to increase one of the two variables and get more than 100% in the end, you will start making money. Let’s say you are playing a special coin that shows tails 60% of the time. You know that and bet tails each throw. Now you will end up having 60% x 2 = 120% after 100 throws.
This is exactly what a good strategy can do for you. A good strategy helps you tweak your results until you know for sure that you will end up with more money than you started with if you stick to your strategy.
For example, a strategy could be that you trade a High or Low option when a certain signal occurs in currencies. By following this strategy, you know you will win 70% of the trades, and get your invested amount plus 80% back. This means that you will make 70% * 1.8 = 126% if you trade this strategy.
The most important part of any Binary Options strategy, however, is not which signal to use or which asset to trade; it is money management. Any strategy that will guarantee you to make money is still a numbers game. That means, there will be trades you lose. Sometimes you will lose many trades in a row, maybe as much as 10, 15, or 20. If you manage your money badly, even the best binary options strategy won’t help you survive these drawbacks. That is where a good money management system is essential to secure your success.
What are examples of binary options strategies?
To give you something concrete to start your career with, we will now present three binary options strategies that beginners can use. Please remember that these strategies are the only possibilities out there and that you can tweak them in any way that helps you increases your profit.
With that said, let’s look at some strategies:
Strategy 1: Following trends
Following trends is a great strategy for newcomers because it combines an easily recognizable market phenomenon with simple instructions and the possibility for accurate evaluations.
Trends are market movements that take the market to new heights and lows. When the market rises or falls, it rarely does so in a straight line. Sometimes it moves unpredictably, but often, there is a structure to the chaos.
Even during the straightest movements, the market usually takes two steps forward and one step back.
- During an upwards movement, the market rises quickly but then takes a somewhat erratic step back and falls for a while before it resumes its upwards direction.
- During a downwards movement, the market falls quickly but then takes a somewhat erratic step forward and rises for a while before it resumes its downwards direction.
The temporary setback is essential to a strong movement because it allows the market to create new demand or supply, depending on the direction it is moving in. For the market to rise in a straight line, traders would have to buy an asset continually, which is simply impossible. There have to be brief periods of interruption to any movement.
The combination of movement, temporary setback, and a new movement is called a trend. Trends often remain intact for long periods of time, allowing traders to find profitable trading opportunities by scanning the market for the unique picture of alternating strong movements in one direction and shorter, more erratic consolidation periods in the opposite direction.
With high/low options, you can predict that a trade will continue.
- When you find an upwards trend, you can invest in a high option and predict that the market will keep moving upwards.
- When you find a downwards trend, you can invest in a low option and predict that the market will keep moving downwards.
Use an expiry that is long enough for the trade to create at least one more swing.
In its simplest form, you can use this strategy just as we described it. If you are a risk-averse trader, you can also use technical indicators to evaluate a trend’s strength before you invest, for example by using the Relative Strength Index (RSI) or a similar indicator.
Make sure to never invest more than 5 percent of your overall capital on a single trade, preferably around 2 to 3 percent, and maintain a thorough analysis and improvement strategy. Then you should be able to execute this strategy successfully. If at all possible, perfect the strategy with a deposit-free demo account from Nadex or IQ Option before you trade it with real money.
Strategy 2: Trading the news
Trading the news might be the most intuitive approach for new traders to find a strategy for binary options, although it requires most of them to do things differently than they first expect.
Trading the news is a somewhat difficult trading style. Most new traders overestimate the connection between the news itself and the way in which the market reacts to it. Financial analysts like to create the impression that the market fell today because there was a specific event, implying that if you had anticipated this event, you could have invested in falling prices and made a nice profit. These are hindsight analyses. In real life, things are more complicated.
Often, the market reacts with falling prices to good news and with rising prices to bad news. The reason for this unpredictability is that traders invest in anticipation of an event. When they expect good news, they buy before the news is released. When the news hit the market and are good but not as great as most traders expected, the market will fall.
To understand whether the market will react with rising or falling prices to specific news, you would need to know the expectations of all the traders in the market and which of these traders will react the quickest. Often, those traders that move first can influence what will happen.
Since it is impossible to look inside other people’s heads, especially if those people are spread all over the globe, it is impractical to trade a strategy that anticipates good or bad market reactions to news events. With conventional assets, this limitation makes trading the news almost impossible.
With binary options, however, there is a solution. This solution is a boundary option. Boundary options define two target prices, one above the current market price and one below the current market price. Both target prices are equally far from the current market price, and to win your option the market has to touch either target price at least once. The price does not need to remain at the target price; the shortest possible touch is enough.
Boundary options are ideal to trade the news. When the government has scheduled the release of its unemployment statistics for 2 PM, for example, you are unable to predict whether the numbers will be good or bad and whether the market will rise or fall in reaction to it. You can, however, predict that the market will react strongly. With a boundary option, this knowledge is enough to win a trade.
All you need to do is invest in a boundary option at 1:55 PM with an expiry of 30 minutes, and you are likely to win your option.
These trading opportunities are rare but relatively safe, which is why you can invest 5 percent of your overall capital in a trade.
You can use the release of a company’s earnings reports and similarly important scheduled news to find more trading opportunities.
Strategy 3: Trading technical indicators
Trading technical indicators is a great strategy for newcomers because it allows for easy yet sophisticated predictions.
Technical indicators aggregate data about past market movements in a way that allows for traders to make concrete predictions. The exact way in which technical indicators aggregate market data depends on the indicator and can vary greatly, but all of them either draw their results into a separate window or directly into the price chart.
Indicators that use a separate window create a definite reading, often a reading that is between 0 and 100. These indicators often define areas of overbought and oversold markets. As soon as the market enters either area, it creates a signal to buy or sell an asset. For example, the area with values over 80 could be considered overbought, and the area with values below 20 could be considered oversold.
To trade a simple strategy based on such an indicator, you could predict a turnaround when the market enters either extreme.
- You would invest in a low option when the market enters the overbought area, and
- You would invest in a high option when the market enters the oversold area.
Of course, you could expand on this strategy by adding additional indicators.
Another option would be to trade moving averages. Moving averages calculate the average price of an asset over the last periods and draw the result directly into the price chart. By relating the current market price to the average, you can create predictions about what will happen.
- When the current market price is above the moving average, the market seems to be in an uptrend.
- When the current market price is below the moving average, the market seems to be in a downtrend.
You can use moving averages to filter the results of other indicators, for example by only investing in high signals when you the current market price is above the moving average and by only investing low signals when the current market price is below the moving average.
Alternatively, you can also trade moving averages directly.
- When the current market price crosses the moving average upwards, this is a sign that the market has recently started to move upwards. You can invest in a high option and predict that this trend will continue.
- When the current market price crosses the moving average downwards, this is a sign that the market has recently started to move downwards. You can invest in a low option and predict that this trend will continue.
As long as your strategy is based on a single indicator, it will create many signals but also contain a certain amount of risk. Consequently, you should limit your investment per trade to 2 to 3 percent. When you add another indicator, you should be able to filter some bad signals but you will also filter some good signals. You will likely win a higher percentage of your trades, but you will create fewer signals. Consequently, you can increase your investment per trade to 4 to 5 percent, depending on how reliable your signals are.
With this type of strategy, all you need to know to trade binary options is how to read one technical indicator. This is a great place to start for newcomers, and you can later expand and adapt your strategy if you want.
A binary options strategy is an absolutely essential factor to your binary options success. You need a trading strategy that tells you what to invest in, a money management strategy that tells you how much to invest, and an analysis and improvement strategy that helps you to improve.
Developing and perfecting your strategy can take some time. Most likely, your first try will be imperfect, just like your first try at driving a car was imperfect. The difference is that trading a bad strategy can cost you a lot of money. To avoid losing money with rookie mistakes, you should get a binary options demo account.
Binary options demos work just like regular accounts, but they allow you to trade with play money instead of real money. In this risk-free environment, you can work on your strategy until you know that you can trade profitably. Only when you have reached the point where you can guarantee that you will make money by the end of the month, you should switch to real-money trading.
The best demo accounts in the business come from Nadex and IQ Option. These are the only two brokers that offer their demos to everyone for free. With all other brokers, you have to get a regular trading account to access their demos, which involves depositing at least $250. While you can withdraw your money once you are done with your demo, there is no reason to deposit a lot of money if you can get the same thing for free.
Additionally, Nadex is regulated by the United States government and IQ Option by the European Union, which provides you with complete protection for your money. Both brokers are the best in the business, and there is no better place to start your trading career.